How Organisations Can Achieve Sustainable Competitive Advantage Through Cost Lea

dership

Introduction
The business environment today is quite fast paced. The economy has changed rapi
dly and there is a need for organisations to implement competitive advantage. Or
ganisations adhering to this principle need to take care of three key areas;
• Identifying sources of competitive advantage
• Implementing competitive advantage
• defending competitive advantage
Companies need to identify which parts of their organisation will help them achi
eve sustainable competitive advantage. Firms have the choice of using finances a
nd their budget to get an edge over their competitors. They could also consider
their human resource segment. Another alternative is through implementation of t
echnological changes. With all these options available, it can become tricky for
organisations to balance the three aspects. (Porter, 1985)
How to achieve sustainable competitive advantage through cost leadership
Cost leadership is all about lowering cost consequently lowering prices of commo
dities. Organisations that implement cost leadership look for methods and approa
ches that will reduce the amounts spent during production. Reducing production c
osts has two main benefits to the Company: First of all, the company will attain
higher profit margins thereby achieving its goals. Secondly, the organisation c
an afford to lower prices and this will give them an edge over all other competi
tors in their business environment. (Baird, 1994)
Achieving cost leadership through economies of scale
Cost leadership can be implemented in a number of ways; companies can use econom
ies of scale. There are links between volume and cost of production; the more a
company produces, the less their cost of production. However, there is an optimu
m volume beyond which firms cannot minimise their cost of production. This aspec
t of cost leadership can be achieved through various routes. For example, Compan
ies that produce large numbers of items are able to take advantage of specialise
d equipment. This will go a long way in ensuring that more products are produced
with less finance. A suitable company is the Harley Davidson Automobile Company
based in the US. Initially, the Company was started as a small venture at the p
ioneer’s backyard. Cost of production was quite high because most automated equi
pments require large numbers of cars. The Company could not afford this and star
ted experiencing low profit margins. But after identifying their dilemma, the Co
mpany was able to obtain more sources of funding and increased its volume of pro
duction; it could now take advantage of specialised equipment. The Company conti
nued with this strategy and today, it is America’s most successful motorbike man
ufacturer. (Smith, 2003)
Economies of scale in cost leadership can also be implemented through the use of
larger manufacturing plants. When companies have huge manufacturing operations,
then they are able to reduce their cost of production per unit item. This scena
rio was witnessed by the FedEx Corporation. Initially, the Company started its o
perations with fourteen jet aircrafts. But it expanded its production area and e
quipments. This was why the Company could expand into many parts of the world i.
e. it became international. The Company realised that with increased numbers of
competitors (these include DHL, Purolator Courier, United States Postal Service
and Emery Airborne Freight) there was the increased rivalry and the it had to co
me up with a strategy that would give it an additional advantage over others. Th
is was achieved through expansion that eventually allowed the Company to use mor
e airplanes for delivery. This meant that they could accommodate more parcels an
d letters. Therefore, the firm had the go ahead to decrease the costs of their s
ervices. (Magaritis, 2001)
Economies of Scale can also be achieved by taking advantage of specialisation of
the employees. Research has shown that when Companies exercise division of labo
ur, then chances are they will become efficient in their levels of production. C
ompanies that apply this principle are Chinese toy manufacturers. These Companie
s realise that most employees have their own field of specialisation. Some focus
on sewing, others gluing, others deal with assembling. These companies made it
their duty to let certain employees specialize in their Fields. Consequently, th
eir employees were faster and more efficient. Employees produced more goods and
these Companies were able to achieve cost leadership. This is the reason why toy
s from China are cheaper than most other toys in the world. (Grant, 2005)
Lastly, economies of scale and overhead costs can be merged. Companies that take
advantage of this strategy are able to spread their overall costs across higher
numbers of units. These will mean that they can afford to lower their prices. (
Benter and Booms, 1981)
Companies should also be aware of diseconomies of scale. There are physical limi
tations on the physical expansion a Company can undertake. Companies who want to
take advantage of cost leadership ought to know the maximum level which their e
xpansion plans can reach. For example, some manufacturing processes can only be
stretched to a certain extent. Otherwise further expansion will only cause more
harm than good. (Barney, 1991)
Diseconomies of scale can also present companies with restrictions when trying t
o achieve cost leadership. A company that is undergoing expansion may experience
problems when trying to go global. This will normally come in the form of ineff
ective managerial positions. Most Companies lack the ability to efficiently mana
ge higher numbers of employees. This case was witnessed by the Gap Inc. Company.
The Company is a clothing retail shop with branches all over the world. But Thi
s Company rapidly expanded without taking into account the diseconomies of scale
. There were too many Gap clothing affiliates but managers did not adjust to thi
s change in Company structure. Consequently, the Company has lost face; they pro
vide a range of goods without providing the market with an outstanding feature.
The rapid expansion should have been complemented with management restructure. T
he Company is currently looking for an efficient and capable general manager to
bring back thee Company to what it was before its rapid expansion plans. (Porter
, 1985)
Firms should also be aware that employees get demotivated when implementing divi
sion of labour. Cost leadership is implemented through specialisation. However,
this causes monotony and leaves little room for creativity. Consequently, such w
orkers will loose morale to complete their tasks and this will affect the overal
l profits gained by the Company. Some of the alternatives that companies can use
to correct this problem include;
• participation schemes
• Quality circles
Companies that implement this strategy should make sure that the distances they
have to travel to reach their suppliers and markets are considered. Organisation
s that plan on expanding their levels of production need to ascertain that the n
ew locations for manufacture are not too far away from their locations. This is
because when transportation costs are too high, companies will have to pay a lot
in terms of transport and this will offset any decreases in cost associated wit
h increased levels of production. (Dyer and Ernest, 1991)
Learning curve
The learning curve is quite similar to economies of scale. The difference is tha
t the former strategy focuses on the kind on cumulative volume in comparison to
average costs of each product. On the other hand, economies of scale focus on vo
lume but at a specific point in time. This is then compared to average unit cost
s of production. The learning curve can be implemented in the same way as the ec
onomies of scale. (Porter, 1985)
Technology
Sometimes technology can be applied to a Company’s operating processes regardles
s of the level of expansion or without consideration of economies of Scale. One
such Company was the Honda Automobile. This Company is a leader in development o
f new technologies. The Company is always coming up with better ways of running
its businesses and has become a global leader in the production of motor vehicle
s. Most of their products are known for their affordability and this has occurre
d through the application of cost leadership. (Grant, 2005)
Companies can achieve cost leadership through the use of efficient technologies
to manage their operations. One such Company is the Marks and Spencer Retail Com
pany. This Company has applied technology in the procurement of products. The fi
rm has also applied technology in coordination of services between departments.
This means that there is less wastage and more efficiency thus bringing about lo
wer production costs. On top of that, Marks and Spencer was one of the first Com
panies in the UK to introduce on- the -counter payments. This was quite useful i
n lowering costs because it meant that the Company needed fewer employees. Conse
quently, very little was spent in terms of labour costs and profit margins were
increased. (M&S Annual report, 2007)
Another Company that applied technology in service delivery was the Amazon Corpo
ration. This Company is exemplary in terms of cost leadership. Their customer se
rvice is conducted through technology; they have instant feedback systems sent t
o consumers every time they conduct business with them. The Company is also exce
ptional in terms of the way it can access a wide range of buyers throughout the
world. Cost of production has been reduced by introducing online selling. Theref
ore the huge amounts of money which would have been spent in manual selling have
been saved and the Company has reduced its cost of production. Amazon has also
lowered overhead costs in terms of advertisement and other marketing techniques.
They discovered online advertising which has gone a long way in ensuring that t
he Company stays ahead of its competition. The Company is well known for the ‘bl
ogs’ that they use for this purpose. (Jeff Bezos, 2008)
Integrating cost leadership with the Porters five forces
The first thing a Company should consider when trying to implement the cost lead
ership strategy is the threat of Entry. Companies should make sure that they bec
ome cost leaders so as to discourage the use of lower costs as an entry strategy
by new groups. When new entrants realise that they have to compete against a ce
rtain cost leader on the basis of cost, then they will opt out. Most of them may
decide to use joint ventures or product differentiation as an entry strategy.
A Company that uses this strategy well is Wal-Mart. Any Company considering the
retail sector in the US has to think of Wal-Mart. Consumers have been able to ac
cess goods and services which they would not afford if it was not for Wal-Mart’s
low cost strategy.
Companies should also integrate threats from rivalries. They can do this by eith
er imitating their competitor’s prices or they could decide to set their prices
lower than their competitors. The former strategy is more risky than the latter
because Companies that imitate their competitors prices usually get a lower mark
et share and may record less sales. On the other hand, setting prices below thos
e ones of their competitors will cause the Company to attract more consumers. Co
nsequently, their sales volume will increase. However, such firms may have to pa
y the price by recording reduced profits. (Benter and Booms, 1981)
Organisations must not forget the role played by threats from suppliers. Supplie
rs can become a hindrance to the cost strategy when they sell low quality goods
or when they increase their prices. If a company is a high cost firm, it may be
adversely affected by suppliers’ increased prices. However, if the firm as a cos
t leader, then they need not worry about higher prices by suppliers because they
can still be able to record high profits. Starbucks is one such Company. It has
secured coffee suppliers from the African and Asian Continents. But because the
nature of their commodity; coffee is quite vulnerable to market forces, supplie
rs increased their prices. The Company employed cost leadership strategy and is
still able to stay above the competition despite supplier increases. Starbucks m
inimised costs by conducting all the coffee manufacturing processes within the C
ompany rather than outsourcing or hiring external firms to do this. It was able
to cut down on expenses and also to ensure that their commodities are of the hig
hest quality. (Starbucks Corporation, 2007)
Lastly, Companies need to put in mind threats of buyers. Buyers can become a hin
drance to Company profits when they demand high quality and at the same time low
er prices. This can become very tricky for firms because higher quality normally
implies more costs of production. Cost leaders need to make sure that they are
able to produce their goods and services according to consumer demands and at th
e same time, they should do this at a lower price. It may become tricky for most
Companies who are cost lenders because they tend to compromise on quality and c
oncentrate on lower costs of production. This is the reason why some consumers m
ay still opt for quality items regardless of their price. A Company that has tri
ed to merge these two aspects well is Tesco Corporation. This Company has ensure
d that consumers are able to access commodities in a fast and efficient manner (
quality